"Discretionary payments”, bonus schemes and the Holidays Act 2003
Many employers will be breathing a sigh of relief in light of the recent Court of Appeal decision: Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business and Innovation and Employment  NZCA 560.
Metropolitan Glass and Glazing Limited (“Metroglass”) had implemented a Short Term Incentive Bonus scheme (“STIB scheme”) as an incentive for employees to hit performance targets. The question for the Court was whether payments made under the STIB scheme were “discretionary payments” for the purposes of the Holidays Act 2003 (“Act”). If so, they would not make up part of an employee’s gross earnings and therefore would not be included when calculating holiday pay.
The Employment Court had previously decided that payments made under the STIB Scheme were not discretionary payments and should therefore be included in the calculation of holiday pay. The Court of Appeal disagreed.
The legal landscape
Under the Act a “discretionary payment” is a payment that an employer is not bound to pay under an employment agreement. The Act provides that a payment will not be considered discretionary simply because:
- The employer has discretion as to how much to pay; or
- The employer is only required to make the payment if certain conditions are met.
Metroglass’ scheme was introduced through documents separate from the employees’ written employment agreements. The Court of Appeal agreed with the Employment Court that the STIB scheme, while not part of the written “employment agreement” contract, still formed part of the employees’ terms and conditions of employment and came within the Act’s definition of “employment agreement”.
The case turned on whether Metroglass was contractually bound to make payments under the STIB scheme, or whether they were truly discretionary.
Payments could be made under the STIB scheme if a certain number of targets were hit. However, even if these targets were hit, Metroglass had complete discretion as to whether it made payment. The Court of Appeal concluded the Employment Court erred in its decision that these payments did not fall into the “discretionary” exception. The Court of Appeal determined the payments were neither “guaranteed nor conditional” and that Metroglass’ decision as whether to make payment under the STIB scheme was a genuine discretion, although subject to the obligations of good faith. This means any payments under the STIB scheme were not to be included in an employee’s gross earnings for the purposes of calculating holiday pay.
The Court of Appeal’s decision restores the legal status of what constitutes a “discretionary payment” to the position it was in before the Employment Court’s judgement.
While this case provides clarity on what constitutes a “discretionary payment”, it also highlights the importance of having bonus schemes with wording which accurately and clearly reflects the intention of the parties. Metroglass’ STIB scheme clearly set out that the payment plan was discretionary. Had there been ambiguity, or inconsistency, the case may have fallen the other way.
If you have further questions about the effects of the Metroglass case, or bonus schemes generally, feel free to contact a member of our employment law team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.